The New Art Economy

With record prices being fetched for Indian contemporary art, investors are making a beeline to acquire paintings with a hope to make a tidy profit. But can art really be treated as just another asset class? While the pundits of the art market debate the risks and rewards of buying art purely as an investment, let’s take a closer look and find out if art can really be a viable financial asset like stocks, bonds, gold and other traded commodities?

Make no mistake, even the mere whisper of art as investment elicits an ambivalent response from many in the art world, although secretly even some of the purists will agree that art can be a good investment especially over the long term. Yet, buyers need to tread with extreme caution. After all it’s not like you can wake up every morning and see how your Husain is faring as you can do if you owned stock in say Hindustan Lever. There are complex socio-economic and cultural factors including an artist’s historical relevance that influence the staying power and prices but art is above all a mater of taste and looking at it purely from an economic angle can be quite perilous – there are enough examples of artists such as American born David Salle who was ‘hot’ thru the 80’s only to be blown away by the winds of fashion only a decade or so later

Moreover, there are some obvious risks in trying to fit art into some kind of asset allocation model – for starters, the art market is not efficient or as transparent as some of the other markets and it is plagued with information asymmetry. Valuation of art remains an inexact science clouded in an air of creative mystery and there is no clear model for what drives returns.

Furthermore, art is not very liquid often taking several weeks if not months before you can offload a work at prevailing market prices, and even when you do manage to cash out, it comes at high transaction costs (which can be as much as 40-60% when you add up all the costs involved in buying and selling such as commissions, premiums, taxes, transportation, insurance etc).

Another big drawback is that art does not have the ability to provide regular returns in the form of dividends or rental income and may not be suitable for those looking to generate predictable cash flows from their investment. Add on to this pile the problems of storage, insurance, risks of damage and deterioration and you quickly see why investment in art is not as straightforward as it seems.

Despite all of the above, the way prices have soared over the last few years, art & finance have become familiar bedfellows and you can hardly blame accidental buyers who have seen the value of their collection soar even as their portfolio of stocks and bonds have provided only lackluster returns in comparison (especially rings true for investors abroad). Even if you are not an investor, it is surely comforting to know that the art you own has increased in value – if nothing else, it validates your good taste and judgment!

In Part II next time we will look at the emergence of India centric art investment funds and discuss what they are and what they mean - to you and to the art market.